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Oil, gas lead S&P 'weakest links' list for high default risk

Despite the mild upswing in commodity gas prices, oil andgas companies are still driving the overall increase in potential corporatedefaults, S&P Global Ratings found.

The oil and gas sector had the most firms on S&P'sglobal list of 249 "weakest links," S&P said. "Weakestlinks" are companies rated near the bottom of speculative grade, B-, withnegative outlooks. S&P blamed low commodity prices for putting 58 oil andgas firms, 23% of the total, on the list.

These companies are the canaries in the coal mine ofcorporate credit. "Weakest links maintain an important role as potentialdefault indicators because these issuers on the lower end of thespeculative-grade spectrum are poised to be downgraded and have greater defaultrisk than higher-rated issuers," S&P said.

S&P said that in August the U.S. corporatespeculative-grade default rate for the trailing 12 months was 4.79%, up from4.70% in July. But for outside energy and natural resources issuers, theoverall default rate was just 2.44% through August.

The number of companies with "weakest link"designations is the second-highest since November 2009, S&P said. The 249companies account for $349 billion in debt.

The newest oil and gas additions to the weakest-link listwere a mix of small E&P companies, such as and oil-fieldservice firms like the Persian Gulf driller Shelf Drilling Holdings Ltd.

One notable absence from the weakest-link list was thesecond-largest U.S. natural gas producer, Chesapeake Energy Corp. S&P removed Chesapeake fromthis edition of weak links and raised its rating out of selective default (forbond exchanges at less than face value) to CCC-plus Sept. 29 on the strength ofhigher natural gas prices and asset sales being used to pay down debt.

"Chesapeake has successfully executed severaltransactions in 2016 to improve both its liquidity and financialperformance," S&P said, noting that its sale of Barnett Shale holdingsto joint venture partner TotalSA cut its costs by as much as $715 million through 2017.

Chesapeake wasted no time in taking advantage of theimproved rating, upsizing an $850 million convertible note offering to $1.1billion on the same day as the credit upgrade.

"Chesapeake has significantly improved its operatingcosts both through organic cost-cutting and the conveyance of the Barnett Shaleassets, which provides a much needed boost to profitability under our naturalgas price assumptions of $2.50 per MMBtu for the remainder of 2016, $2.75 perMMBtu for natural gas in 2017 and $3.00 per MMBtu thereafter," S&Psaid.

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S&P Global Ratingsand S&P Global Market Intelligence are owned by S&P Global Inc.